Goldman Sachs uncovered a trading strategy that's crushed the market for 16 years — one the firm says will keep soaring in 2019

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The derivatives team at Goldman has identified an options trading strategy designed to thrive in a sideways stock market.

Goldman is on it. The firm's derivatives team has identified anThe approach involves the sale of so-called covered calls — a process known as overwriting. In doing so, the investor holds a long position in a stock while simultaneously selling call options on the same stock in order to generate income."Options provide asymmetric exposure to the underlying asset, unlike stock or stock-like investments," Goldman analysts wrote in a recent client note.

The strategy has beaten the broader market by even more over the past three years. Goldman finds that, since 2016, it's resulted in outperformance of 260 basis points per year.And while there's still ample opportunity for the average investor to get involved in the sale of covered calls, Goldman says its clients have been asking about it more and more.The never-ending search for yield

The last piece of the puzzle for an investor is deciding which individual stocks to overwrite. Since a stock must already be owned in a portfolio to be overwritten, that helps narrow it down right off the bat. Allow Goldman to fill in the rest: "Portfolio managers with the flexibility to overwrite typically use a combination of stock views and volatility views to identify which of these holdings are attractive," the firm said."Stocks with limited upside or low volatility expectations make the best overwrites."

 

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